Significance of Money in modern economic life

Money occupies a central position in our modern economy. Money is everywhere and for everything in the modern economic life. Money has become the religion of the day in the ordinary business of life. Every branch of economic activity in a money economy is basically different from what it would have been in a barter economy. Money has created a far reaching effect on all facets of economic activities; consumption, production, exchange and distribution, as also on public finance and economic welfare.

Money and Consumption

Money enables a consumer to generalize his purchasing power. It gives him command over a wide variety of goods. It enables him to canalize his purchasing power and get what he wants. In fact, it is money through its immense purchasing power that makes a consumer sovereign in a capitalist economy. The consumer’s sovereignty can be expressed through money spending. Money provides freedom of choice of consumption. Money and the price mechanism help a consumer to allocate his income over goods in such a way so that he derives maximum satisfaction from his consumption.

Money and Production

The introduction of money has made present day mass production possible. Without money, production on a large scale would be impossible. The benefits of money in production are as follows

  • Money has made extreme division of labour possible. Intensive specialization is necessary for large scale production.
  • Money is the very essential for modern enterprise. Entrepreneurs are concerned, while planning their production activities, with the cost of production and selling prices together with the resulting profit, all calculated in terms of money.
  • The use of money enables a producer to concentrate on the organization of the production process. Money provides a basis for supporting more complex methods of organizing production.
  • Money has facilitated borrowing and lending and these are essential in present day production. Credit is the main pillar of modern business.
  • Money is the most liquid and general form of capital which is highly mobile between different regions and industries.
  • Money helps the producer to discover through the price mechanism what buyers want and how much they want, so that he can produce and supply accordingly. In fact, money has changed the basic characteristics of production.

Money and Exchange.

Money overcomes the difficulties of a barter system of exchange. In a money economy; it is simple matter to ascertain the market price in terms of monetary units. Money facilitates trade by serving as a medium of exchange. Thus, rapid exchange in a modern economic system is possible because of money. Money is the basis of the pricing mechanism through which economic activities are adjusted.

Money and Distribution.

Money eases the process of distribution of factors rewards like wages, interests and profits which are all measured and distributed in terms of money. It is with the help of money that the shares of different factors of production are properly adjusted. Accounting, receiving and storing of its share of income by any factor-unit in kind is most inconvenient. Here money comes to the rescue.

Money and Public Finance

In a modern economy, government plays a very important role. Government receives income in the form of taxes, fees, prices of public utility services, etc and uses this income for administrative and developmental purposes. But the great magnitude of public revenues and public expenditure in a modern state would become impossible without money. Further, fiscal devices like public borrowing and deficit financing for economic development can be adopted only in a monetary economy.

In recent times, the fiscal policy of a government acquired very great importance in economic life, since economic activities can be regulated through budgetary operations that are facilitated by the institutions of money.

Money, thus, plays an important role in the shaping of the economic life of a country. The growth of money economy has made the growth of economic liberalism and, hence, of the present day free enterprise or capitalists system possible. In fact the pattern of economic life has changed in accordance with the changes in the economic progress. For better performance of an economy, a country’s monetary system should be operated in such a manner as to maintain high levels of employment and avoidance of business fluctuations.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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